Greece "Junk" Credit Rating

Katy Grimes: Despite receiving a record bail out from the European Union, Greece just lost its last investment grade rating as Fitch Ratings, one of the world’s biggest bond rating agencies, downgraded the country’s debt one notch to “junk,”  Bloomberg Business news reported late last week.

The country’s “heavy public debt burden renders fiscal solvency highly vulnerable to adverse shocks,” a Fitch analyst said.

What does this mean for the United States?

Given that the credit crisis has already spread to Ireland and Portugal, the EU is forcing governments to begin crafting new policies “to stop the rot before it gets to Spain.”

A story appeared in Vanity Fair recently, written by veteran journalist Michael Lewis, with one of the best explanations of how Greece propelled so quickly into insolvency.

On a visit to Greece last year, Lewis wrote, “German politicians suggested that the Greek government, to pay off its debts, should sell its islands and perhaps throw some ancient ruins into the bargain. Greece’s new socialist prime minister, George Papandreou, had felt compelled to deny that he was actually thinking of selling any islands. Moody’s, the ratings agency, had just lowered Greece’s credit rating to the level that turned all Greek government bonds into junk—and so no longer eligible to be owned by many of the investors who currently owned them. The resulting dumping of Greek bonds onto the market was, in the short term, no big deal, because the International Monetary Fund and the European Central Bank had between them agreed to lend Greece—a nation of about 11 million people, or two million fewer than Greater Los Angeles—up to $145 billion. In the short term Greece had been removed from the free financial markets and become a ward of other states.”

But Lewis explained, that was only the good news. “The long-term picture was far bleaker. In addition to its roughly $400 billion (and growing) of outstanding government debt, the Greek number crunchers had just figured out that their government owed another $800 billion or more in pensions. Add it all up and you got about $1.2 trillion, or more than a quarter-million dollars for every working Greek. Against $1.2 trillion in debts, a $145 billion bailout was clearly more of a gesture than a solution. And those were just the official numbers; the truth is surely worse. “Our people went in and couldn’t believe what they found,” a senior I.M.F. official told me, not long after he’d returned from the I.M.F.’s first Greek mission. “The way they were keeping track of their finances—they knew how much they had agreed to spend, but no one was keeping track of what he had actually spent. It wasn’t even what you would call an emerging economy. It was a Third World country.”

Does any of this sound familiar?

Experts from Fitch stressed on the government’s inability to collect taxes and to tackle tax evasion. Lewis explained that tax evasion in Greece is standard operating procedure: The Greek people never learned to pay their taxes …. because no one is ever punished. It’s like a gentleman not opening a door for a lady.”

While the U.S. seems to be more of a bulldog about tax collection, skyrocketing debt and the expansion of government and public pensions is sinking many states closer to the brink of financial disaster.

But perhaps the situation can best be related to the United States “Where waste ends and theft begins almost doesn’t matter; the one masks and thus enables the other.”

(Beware of Greeks Bearing Bonds)

JAN. 17, 2011

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